Phl-China relations: Doing business as usual in unusual times

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(Last of 3 parts)

The Challenge of our leadership

This mindset is not uniquely Chinese. Although President Aquino has little danger of being run out of office, he still has to keep in mind that the majority of the Filipino people as well as the legislature and civic society want him to stand fast and resists resist Chinese bullying. For the public, this resonates as an issue of safeguarding our sovereignty from foreign occupation more than a fight for oil or for fish.

Joint development seems to offer a feasible alternative. Chinese leaders in the past, from Deng Xiaoping to Jiang Zhemin and to Hu Jintao, have all proposed shelving the sovereignty issue and pursuing joint development of resources. President Xi Jinping himself has been quoted as saying that claimants “should work together to strengthen dialogue and communication, advance maritime cooperation and joint development to maintain peace and stability in the South China Sea”.

Joint resource development could mitigate conflict and reduce tensions, and bring about an environment conducive to constructive resolution over the long term. For the Philippines, the benefits would also include attracting much needed investment and obtaining the necessary technologies – China has deep sea drilling capability – to fully exploit its resources. For China, this would provide a readily available source of energy at its own backyard. By engaging in joint development with a neighbor with whom it has maritime and territorial disputes, China can shore up its image as a good neighbor and a responsible regional and world power.  This collaborative approach will also allay the fears of other claimants and those who use the water for passage that China is out to gain complete and exclusive control of the South China Sea.

Will this work in practice? In 2005, China and the Philippines (joined later by Vietnam) signed a Joint Marine Seismic Undertaking (JMSU) agreement that coordinated “pre-exploration” of possible hydrocarbon reserves in the Spratlys. The JMSU was not extended when it expired because of nationalist sentiments in the Philippines – which coincided with the corruption scandals involving Chinese projects in the country.

In 2012, Manuel V. Pangilinan went to China to dialogue with the state-owned China National Oil Corp. (CNOC) regarding a potential joint exploration and development arrangement for his company’s – Forum Energy – concession in the Recto Bank. Pangilinan earlier explained that the partnership with CNOC could boost financial and technological support for the project and, at the same time, serve to “depoliticize” the concession area. This commercial arrangement made between corporations and bypassing direct government to government talks seems like a promising start to a model for a win-win solution.   Such a joint venture is an option that China has consistently supported. China’s ambassador in Manila told a local newspaper it would be better for Forum and CNOC to get to work, instead of letting the reserves sit untouched while the two countries sort out their differences.

However, the devil is in the details. The Philippines has said it would support a Philippine-Chinese partnership in the region, provided it conformed to Philippine law, meaning parties would have to follow the 60 percent locally owned-to-40-percent foreign owned rule, among other requirements. President Aquino said recently he supports a joint partnership as long as royalties would go to the Philippines. It is this question of royalties that poses the biggest challenge to a joint drilling partnership. From the Chinese perspective, the implications are that if it follows Philippine laws and regulations, then to some extent, it is conceding the sort of sovereign right to the Philippines in what it considers their waters. The proposed joint venture has been on hold up to now and with the arbitration case expected to last several years, now finds itself in limbo. Forum’s earlier attempt to drill in its concession in 2011 was disrupted by Chinese vessels and while it has announced it will drill again in early 2016, the question remains as to whether it will have the capability to do so and whether it will not invite Chinese interference unless the joint venture comes into existence by then.

China’s insatiable demand: Abuse of small scale mining

Our experience as a recipient of Chinese investments also points to another potential pitfall. As everyone knows, China continues to reach out overseas for minerals needed to fuel its dramatic economic growth, and long-term prospects show that it will only become more aggressive in its pursuit of mining deals abroad. Our estimated $1 trillion worth of untapped mineral reserves has seen a notable influx of Chinese mining investments in recent years. For the Philippines, Chinese money from legitimate mining companies has been a welcome relief for its troubled mining industry that has seen a flight of investment from Western mining giants on top of a growing list of stale and frozen projects. Unfortunately, most of these investments have been in small-scale mining and substantial evidence points to unaccountability, misconduct, and corruption in many Chinese mining deals. Most Chinese mining firms operate under the cover of domestic small-scale miners to bypass Philippine mining laws and protocols, as well as to avoid the large capital requirements, fees, and taxes associated with large-scale mining. The Chinese firms circumvent the enormous time and expense of complying with large-scale mining requirements by co-opting a Philippine proxy and purchasing small-scale mining permits or special ore extraction permits for a minimal fee.

These activities may seem like penny ante but the volume is staggering. The Philippines is already the largest provider of nickel ore imported into China, and the leading provider of gold imported into Hong Kong. Few experts believe the volume of gold and nickel ore going into these territories could be achieved by legitimate mining operations. For example, the volume of gold exported to Hong Kong recorded by Philippine government agencies is only three percent of that recorded by Hong Kong authorities meaning that there is enormous amount of smuggling going on resulting in massive tax losses for the Philippines. This also means that because these operations are largely unregulated, these result to the degradation of the environment and only made possible with the help of corrupt government officials.

Conclusion

In conclusion, I have no magic solution to this issue other than to preach the virtues of patience, perseverance, recognize the importance of “face” and appreciate what is going on internally in China. Avoiding harsh rhetoric and maintaining a level of subtlety and restraint even when addressing domestic audience would be helpful. Aligning ourselves with the US and Japan and getting world opinion makes a great deal of sense but should not be done in a public and provocative manner that will arouse hawkish reaction and fuel nationalism from the other side. Flexibility is also called for – in our position and in our mode of negotiations - something which Vietnam has done very well with. We should be careful not to paint ourselves into a corner much as China has done with its nine-dotted line argument. Finally, we should speak with one voice but we must also use alternate channels of communicating with the Chinese side. This means that plurilateral fora should not be the sole means of negotiating with China – bilateral talks serve a purpose including providing as a stepping stone and confidence builder for multi-party talks needed to guarantee compliance.

The offer of leaving the sovereignty issue aside and pursuing joint development seems the best way out at this point in time. The use of commercial arrangements as a device to go around politically sensitive issues should be explored. Nationalist sentiments must give way to pragmatic solutions – such as on the issues of royalties - that address immediate economic and security concerns without giving up our claim which international law supports. While this approach will directly resolve the energy issue for China, it also paves the way for an atmosphere conducive to addressing its strategic concerns relating to freedom of navigation.

The arbitration case presents an obstacle and an opportunity at the same time. With the current dynamics, there is little likelihood that the Philippines will withdraw its arbitration case nor of China participating in the process. The Philippines says it will abide by the ruling of the Tribunal. But China has already said it will not even if the tribunal rules against the legitimacy of its nine-dash line.  It has shown time and again that while it will prevent it to the extent possible, it is prepared to sacrifice global condemnation to preserve its domestic agenda. The timing of the arbitration process presents an opportunity for both sides to save face. A ruling is not expected until 2016, about the time of the Philippine Presidential elections. The Chinese have cast President Aquino as chief architect of the Philippine policy in the South China Sea and his diplomat-in-chief, Foreign Secretary Albert del Rosario as his chief advocate. The question arises: With their exit from the scene will both sides find an opportunity to change tack (as in sailing terms) to counter the headwinds and move forward. Unfortunately, my crystal ball doesn’t look that far. Or as Tonto said to the Lone Ranger : “Quimo Sabe” Who Knows???